The Reserve Bank of India (RBI) has said that the flexible inflation targeting (FIT) framework has worked well since its introduction and has served the needs of the country even during difficult times.In a recent report, the RBI highlighted that the FIT framework, which was introduced to maintain the inflation rate in the country, has broadly performed well in terms of price stability.
According to the report, from the inception of the framework till about the end of 2019, inflation in India remained low and stable, averaging around 4 per cent.
It stated, "The experience of FIT framework, introduced in the year 2016 and first reviewed in 2021 has broadly performed well."
However, the report pointed out that the conduct of monetary policy became more challenging in the later period due to repeated shocks to food and fuel prices.
These shocks became more visible during the post-pandemic phase and the Russia-Ukraine conflict, which pushed inflation away from the target range, a trend similar to many other economies.
The RBI highlighted that India's experience with inflation targeting is unique compared with other countries. This is because more than half of the consumption basket in India consists of food and energy items.
Supply-side shocks to these items created outsized challenges for stabilising inflation, much greater than the efforts required in other nations that adopted inflation targeting.
This, the report said, makes India's experience important and full of lessons for other countries facing similar vulnerabilities.
The report further observed that price stability in India has been the result of effective coordination between the government and the central bank.
While the RBI focused on monetary tightening measures to prevent second-round effects of rising prices, the government carried out supply-side interventions to ensure smoother availability of essential goods.
This monetary-fiscal coordination, according to the RBI, played a crucial role in ensuring the success of the flexible inflation targeting framework.
The central bank noted that the credibility and flexibility embedded in the framework have served the country well amidst global difficulties. It added that this framework can also be a useful template for other countries that are vulnerable to inflationary pressures originating from supply shocks.
Overall, the RBI emphasised that the FIT framework has not only provided stability in normal times but has also stood the test during periods of extraordinary global challenges.
